Archive for February, 2012

Staying away from illegal interview questions is vital according to a recent CBS News blog. Do not screen people for: race, color, sex, religion, national origin, birthplace, age, marriage and disability status. You can, however, “re-work some legal alternatives”.

If you want to know how old someone is, ask them if they’re “over the age of 18”. If you want to know if they have kids, ask them if they’re “willing to travel”. That last one is interesting, because it naturally assumes people with kids don’t want to travel – who does, really? (For work, that is.)

Keeping these guidelines in mind, what should you ask the person you may ultimately entrust with your personal and confidential information?

Query Their Professional Age

You do want to know how long this person has been working in the business. Short of “carding” them, ask them to tell you about their work experience. How long have they worked with the carrier(s) and brokerage house(s) they represent? When did they get their accreditation(s) and how long have they held each of their industry licenses?

A word of caution: If you run into someone who advertises or speaks in terms of “big returns”, “no risk”, or “guaranteed appreciation”, run for the hills! The SEC and a slew of other governing agencies haven’t caught up with them yet.

The financial services industry is strictly regulated with regard to the way financial professionals are allowed to talk about their services. This pertains to anyone handling: stock/bond/commodity trades, life insurance, annuities, retirement accounts and the like.

Get a Complete Service List

When you hire a professional advisor, look for one who can shed light on your big picture. Those who handle life, health and property insurance, in addition to financial services will be able to serve your interests best with a complete profile in hand.

The key theme here is to avoid the pitfalls of mixing apples and oranges. The last thing you want to do is spend more than you have to with cross over coverage or waste money on products you don’t really need. Working your complete profile will also avoid the demise of ineffective protection and planning.

Fee or Free?

Many planners market themselves on the premise that charging fees guarantees honest service. They say this because charging you like an attorney demonstrates they are not beholden to any one service provider.

Working with a Planner/Advisor that is a Broker (who won’t charge you fees upfront) can also provide objective placement on your behalf. Professional planners who are brokers contract with multiple insurance carriers and investment houses that pay them commission on orders they place. (Keep that in mind if you opt to work with a fee based planner – use it to negotiate cheaper billing rates.)

On the opposite side of the spectrum are “captive agents” – those who work for (and are beholden to) a single carrier or investment house. While they do not charge fees for their services they are employees.

In recent years some insurance carriers such as, Allstate, have branched into financial product lines. To date, however, they do not provide one advisor to serve their customers’ multiple needs. In this scenario, finding the best advisor for your needs is left to chance.

Take Away

Look for someone with professional designations licensed in multiple product lines. Ask them to share their experience with you and request a complete list of services.

Work freely with a Broker Advisor. Planners who are brokers have access to numerous companies which gives them an edge on finding the best solutions for their clients.

If your Cousin Joey is a captive agent with State Farm, don’t shy away from working with a professional planner. Just make sure to let your advisor know about everything you have in place.

According to the Bureau of Labor Statistics, more than half of the money we spend goes to housing and transportation. Reading about the breakdown of consumer spending, started me wondering…

1) Why do we naturally bristle at the thought of saving money?

2) Why does the discipline of wise money management overwhelm us?

3) Why are we so great at finagling funds for fun, funky and frivolous stuff?

If you can relate (and honestly, who can’t?), you might be interested in knowing there is quite a plethora of documented theory that speaks to these questions and more published under “Behavioral Economics” and “Behavioral Finance”. In simple terms, these theories address how social, cognitive and emotional factors affect our economic decisions. If you care to read historical timelines and academy, find them here: Wikipedia, AOBF and Neuroeconomics – yes, there is such a thing as Neuroeconomics – it is a focus for explaining “human decision making”.

Mental Accounting

Investopedia.com offers insights as to why we do and don’t spend certain resources under the auspice of, “Mental Accounting”. This concept suggests that much can be learned from the way we separate and allocate our money.

Mental Accounting is a subjective view of money. For example, when we earmark paychecks for monthly living expenses but think of “found” or unexpected money, such as tax refunds and lottery winnings, as money that can be freely spent, it is a subjective allocation.

Conversely, unemotional and logical money management does not recognize a difference between a $2,000 paycheck and a $2,000 winning lottery ticket – $2,000 dollars is $2,000 dollars regardless of source. (See the full tutorial here.)

Follow the Money

How can we nip Mental Accounting in the bud? Try following your money around for the next month in words – literally. If you’ve ever dieted, you know how helpful keeping a food diary is. No one likes doing them, but it is the most telling tool you can give yourself. Write down what you spend, allocate, and save every day – what, where, and why you spent it too. This includes the checks you write on your monthly bills.

At the end of the month you will be able to detect the way you think about money and possibly find some red flags you hadn’t seen (or thought of as such) before. For example, are you holding onto low interest bearing accounts and making high interest rate credit card payments? Could you pay off a small debt right away by using some of your ‘fun’ money? Are you keeping spare change in a can or buying dollar scratch offs?

Brace yourself, all those trips to Starbucks, Subway and Super K may just rise up and slap you silly across the face. Good luck.

There is nothing worse than a home improvement project gone wrong. You waste a ton of time running back and forth to Menards because you know you can do-it-yourself and end up wasting way more money in the long run more often than not. (Been there, done that, more times than I want to admit.) That’s exactly what I thought of when I read this stat from a recent Franklin Templeton survey:

78 percent of 35-44 year olds are concerned about managing their retirement plans to cover expense, yet only 23 percent work with a financial advisor.

Findings like these are a red flag in my industry. When I read reports like this I get the same look on my face that our handyman gets when he sees something I tried to do on my own. On second thought, that’s not true because he usually laughs at what I try to do and I’m not smiling right now.

66 percent of those who map out retirement strategies with an advisor understand what they will need to withdraw each year in retirement.

Now, I’m smiling.

No Wealth Requirements

Ask 10 different people why they don’t work with a financial advisor directly and you’ll get 10 different answers. Reasons, beliefs and excuses come in all kinds of shapes and sizes:

41 percent of those who don’t use an advisor say it is because they think they don’t have enough money to do so.

Now, I’m mad. Having enough money is what this is all about. Planning is building, and we all start from different places. There is no level we have to reach before we can seek help.

So, why would the surveyed respondents feel this way?

There are three reasons I can think of: 1) It’s just one those many (erroneous) assumptions we make about things, 2) They met an advisor who only works with high value accounts – strictly a business prerogative, or 3) A carnival barker told them so. Enough said.

No Instruction Manuals

Unlike putting in a new sink, planning for retirement, or any other monetary based goal, does not come with an instruction manual. Variables affect money management:

65 percent of Americans aged 65 or older said they will have to work between one and 10 more years before being able to retire.

The top two retirement concerns cited in the survey, after “running out of money”, were healthcare expense and changes to Social Security that would reduce or delay benefits. Both variables; add to these: societal change, market fluctuation, the cost of living, interest rates, and job opportunities.

30% percent of people who don’t use an advisor say it is because they want to do it themselves.

If I were to give the number reason why you should work with a financial advisor, it would be because of variables. Professional advisors understand actuarial concerns as well as they do the concerns of their clients. Matching peoples’ personal needs and goals with the right mix of financial instruments is tricky. There is no one size fits all approach; nor should there be.

Navigate the variables with the help of a financial advisor and put a smile on your/my face!

In speaking with a client recently, I was asked to describe the difference between Defined Benefit Plans and Defined Contributions Plans. I was a bit taken a back because I assumed these were commonly understood concepts.

Investigating further, I discovered my assumption was wrong. The differences between Defined Benefit Plans and Defined Contribution Plans are not very well comprehended – even among many astute financial people.

Defined Benefit Plans

DBP’s are typically thought of as “old school” pension plans. When you enroll in these plans, the employer makes a promise to make specific payments based on formulas with variables such as number of years with the company, wages, age at retirement etc.

Companies will then fund these plans according to their own formula. Some companies have 100% company contributions to fund these plans while others will require employee contributions.

One of the main differences between these plans and Defined Contribution Plans is that the burden of investment return is with the employer. Any shortfall in the contractually promised benefit must be made up by additional contributions in a defined benefit plan. Contrarily, any surplus can be utilized to reduce future contributions to meet these obligations. These plans are becoming less and less prevalent as employers look to avoid the extra liability of making up contributions if investment returns lag.

Defined Contribution Plans

DCP’s are the plans with growing popularity. An example of these types of plans would be: SIMPLE, 401(k), 403(b), and Section 457 plans. Employees are able to set aside a portion of their pay on a before tax basis. In some cases the employer will have a matching contribution that will be added in addition to the employer contribution.

The employee contributions are always 100% vested if that employee leaves employment. The employer contribution usually has a vesting schedule where a portion of the employer contribution will be forfeited by the employee if their years of service are not sufficient.

Other Comparisons

Defined Benefit Plans typically promise a lifetime of contractual income once you enter retirement. Defined Contribution Plans offer no such promises. Once your funds are depleted, your income stream is over. On the other hand, Defined Contribution plans will generally have a beneficiary designation where any remaining funds in the account can be passed to a beneficiary upon death.

Defined Benefit Plans provide choices as to how you prefer your lifetime income would be paid out. For example, you could receive the highest payout if you select a lifetime option with no provision for spousal continuation. You can also typically select a lesser amount with the remainder paid to a spouse if they survive you. These plans have no provision for leaving unused assets to non-spouse beneficiaries.

Retirees can select payment options as they see fit with Defined Contribution Plans. People can choose to take as little as is required by the IRS minimum distribution requirements all the way up to redeeming the entire account. Defined Contribution Plans offer the opportunity to pass assets along to beneficiaries for any unused balances.

Take Away

The biggest difference between DBP’s and DCP’s lies in the responsibility for investment return. In a Defined Contribution Plan, the onus of return lies with the employee. If their returns are not sufficient, it is up to them to increase their contribution rate or have fewer funds available at retirement.